Intrepid Potash, Inc. (IPI) Q1 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash Q1 2016 earnings conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Jennifer Omquid [ph] of Investor Relations. Please go ahead.

Thank you, Anastasia. Good morning, and welcome everyone. I remind you that parts of our discussion today will include forward-looking statements, as defined by U.S. Securities Laws. These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable. These statements are based on the information available to us today, and we assume no obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the SEC. During today's call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in this morning's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. Presenting on the call today are Bob Jornayvaz, our Co-founder, Executive Chairman, President and CEO; and Brian Frantz, Senior Vice President and Chief Accounting Officer. Jeff Blair, Vice President of Sales and Marketing is also available for Q&A. With that, I'll turn the call over to Bob.

Thank you, Jennifer and good morning everyone. As you can see from the news we put out this morning, we made several big operational moves intended to transition the company to a smaller, lower cost producer. I want to address these items first. Over the last several months, we've spent significant time analyzing and evaluating our options at our West facility. Today we announced our decision to idle West until the economics surrounding the facility and the potash market in general improve. This decision was difficult but a necessary move given the current macro environment for potash. West's transition to care and maintenance mode is expected to be completed in July. I'd like to take a moment to acknowledge and thank the contributions of our employees in Carlsbad and I empathize with those employees and families that received this difficult news this morning. As we scale back our business, we continue to make changes designed to reduce our overhead and streamline our organization. In our 8-K file this morning, we announced it was mutually agreed that Kelvin Feist would be leaving Intrepid to pursue other interests, that the position of Senior Vice President of Sales and Marketing would be eliminated effective May 6. We’re thankful for the leadership he’s brought to this organization and wish him all the best. With his departure, we’ve promoted Jeff Blair to Vice President of Sales and Marketing. I want to point out that we are able to put the West facility on care and maintenance due to its close proximity to the HB mill facility and our East facility. This should allow us greater flexibility to resume production at the facility in the future should market conditions warrant. Likewise, because the facility will be on care and maintenance, there will be some ongoing costs to maintain the facility and the equipment, which I'll let Brian get into in a moment. In addition to the West transition, we announced this morning that we’ve successfully converted the East facility over to Trio production, significantly ahead of our initial target date. The commissioning process was initiated in early April and we’ll be ramping up our Trio production over the next several quarters. With these two strategic moves, we will effectively remove 625,000 tons of the highest cost and lowest margin potash from our sales mix at a critical time when the potash oversupply in the market has pressured profitability. What remains going forward is our lower cost potash from our solar solution mining, as well as increased Trio production. By moving forward with our more cost advantage solar solution mining facilities, we have a greater opportunity to capture margin in this depressed potash pricing environment. We believe our understanding and application of low cost solution mining in our geographically favorable locations are to our advantage as this becomes a larger part of our overall portfolio. Obviously, weather will play a bigger part in our ability to capitalize on the rich reserves in these mines. So we believe our margin opportunity significantly exceeds the additional exposure we'll have to potential weather variability. Our testing at East throughout the latter portion of 2015, during our first quarter of this year, has paid off, as the initial results from the conversion to langbeinite-only production have exceeded our expectations. In addition, by focusing the East operations on Trio and its recovery, simplifying the Trio production process, lowering headcount and accessing our higher ore grades, we should see lower costs per ton once we have ramped up to a point where we can achieve these economies of scale. This in turn should allow us to be much more cost competitive with fertilizer alternatives. We continue to believe there are additional opportunities for Trio success in both the North American and international markets going forward with consistent supply in North America and by broadening our footprint in the international arena. But as this additional Trio product flows into the market, we anticipate our net pricing should decline due to lower netback export markets and an increase in supply. This morning, we announced our noteholders waive compliance with the financial covenants under our senior notes until June 30, 2016. Similarly, the lenders under our credit facility have waived for the same period our requirement to comply with the financial covenants and the requirement that we deliver 2015 financial statements absent a going concern provision. As we work towards a permanent solution, we also agreed to lower the amount available to us under the facility to $8 million which may be used for letters of credit. As we work towards a final resolution of these debt covenant issues, we're appreciative of the additional time these extensions provide us so that we continue thoughtful conversations and work towards a mutually agreeable resolution on the notes. We are also considering a proposed replacement alternative to the current credit facility and are appreciative for the additional time to perform our due diligence and negotiate that alternative. As we have said before, we expect to have sufficient liquidity to meet our obligations as they come due. In wrapping up, I want to underscore that the decisions we’re making for the business now demonstrate our commitment to positioning Intrepid for the long term, even during this very challenging part of the cycle. As we continue to execute on operational initiatives we've laid out with East and West, and as we continue conversations surrounding our debt structure, we're focused on lowering our cost of production and positioning the company to weather these macroeconomic headwinds, however, long they might last. Now, Brian will update you on the financial results and the outlook.

Thanks, Bob and good morning. First off, I want to remind you that our first quarter results do not include any of the effects from the operational changes at our East and West facilities that Bob just discussed. Our results do, however, reflect the market pressures we and others in the industry have been feeling the last few quarters. While we experienced good sales volume in the quarter, a 40% year-over-year decline in potash pricing weighed heavily on our top line. We continue to feel the effects of general oversupply in the market, resulting from increased competition from foreign competitors and overall economics at the farm gate. Trio pricing remained relatively resilient once again. So overall softness in the fertilizer market has pressured and will likely continue to pressure Trio pricing for the remainder of 2016. During the quarter we incurred lower-of-cost-or-market charges of $9 million on our potash inventory. These LCMs are primarily related to our conventional production facilities at East and West. The entirety of the East plant LCM was related to potash production where we experienced higher than normal costs in the first quarter due to accelerated depreciation and parts inventory write-down, all incurred as a result of the conversion to a langbeinite-only facility. In addition to the LCM at East, we had approximately $700,000 in costs associated with abnormal production related to the last bypass test run for Trio at East prior to the April commissioning. We expect to report additional abnormal production charges in the second quarter related to the conversion as we had no production for about a week in the first part of April. We ended the quarter with cash and investments of $55 million and total indebtedness of $150 million. Cash flow used in operations was about $1.1 million and our CapEx was about $6 million. Next, I want to touch a bit on some of the financial implications from the moves we’re making at our West and East facilities. We’re still not in a position to give formal guidance for this year but I'd like to provide some additional color around how we're thinking about these changes. Related to West, we anticipate taking charges in the second quarter related to the transition of West to a care and maintenance mode. These charges relate primarily to cash severance costs, outplacement services and other related charges. Right now we anticipate these charges will range from $1 million to $3 million. I currently don't anticipate further impairment charges related to West in the second quarter. From a profitability standpoint, the changes at West eliminate losses that we've been incurring at the facility and create some opportunities for additional cash savings on a go forward basis as we utilize some of the West assets to satisfy capital needs at East in lieu of additional capital spending. All in, we anticipate these savings will yield about $4 million to $5 million in cash annually assuming today's potash prices. But we likely won't see that benefit until 2017 due to the cost of the transition and the fact that we’d already planned to defer substantial amounts of capital this year. Offsetting these savings is approximately $500,000 to $750,000 annually in expected ongoing expenses to maintain the facility and related assets under the care and maintenance program. The transition of West to care and maintenance will have a positive impact on our cash balance in the second half of ’16 as we expect to convert our existing red granular inventory of 125,000 tons to cash by the end of 2016. I expect we will incur some LCM charges at West during the next 60 days but after that absent potash price decreases, we should not have any additional LCM charges on our red granular inventory once West transitions into care and maintenance. As Bob alluded to earlier, the removal of our high cost conventionally mined potash from our portfolio, as well as the ramp up of Trio will affect how Intrepid looks financially. Looking at potash specifically, beginning in July of this year, 100% of our potash production will come from our solar solution mines. Historically we have produced potash from our solar solution mine at a cost significantly less than the cost to produce at our conventional mining facilities. As a result of not mining potash conventionally, beginning in July of 2016, we anticipate that our cash cost per ton for potash would decline meaningfully, once we have sold down the remaining inventory from West and East. Once this inventory is sold off, we anticipate that our normalized potash costs from operations -- solar operations will be between $110 and $125 per ton dependent upon normal production levels. And with that, concludes our prepared remarks. And we're ready to take questions.

[Operator Instructions] The first question is from Mark Connelly of CLSA.

Thank you. Bob, if I remember correctly, I think you were hoping to reach one to one with the potash removed and the Trio at the East mine. It looks like you're short of that now. Is this where you think you’re going to end up or is there a learning curve there?

I think if you'll remember the remarks, we said that we could easily ramp up to that sequentially quarter over quarter. I'd say right now on an annualized rate, we believe we're in excess of double our 2015 production based on what we're producing as we speak. So our ability to ramp up on a one for one basis over the next few quarters we think is easily achievable.

And just one more question. Do you have a rough idea of what it will cost to restart West, if that opportunity came up, say, in the next year or two?

I think it's premature to put a number out. The good news is that West mill is literally hundreds of yards away from our HB mill. So our ability to put it in the care and maintenance is not that difficult. And then we connected the East mine and the West mine underground, so once again crews are able to go in there and keep things in a care and maintenance position. So it's going to be a lot lower cost than a normal mine would have because of the proximity and the availability of workers that are literally right there on top of it.

The next question is from Chris Parkinson of Credit Suisse.

Hi, this is Greg Long [ph] on for Chris. Just two quick questions. First, thinking about the transition at East, and wondering if you guys could help us to think about your costs there going forward as you ramp up and if you could give any color on kind of the cadence of the ramp up. And then two, just if you could elaborate a little bit further on your comments surrounding to your pricing moving forward and how we should think about to your pricing in an environment where MOP pricing is continuing to fall? Thanks.

Well, let me start with where we believe we are today and so we've had 30 days of production. We believe on an annualized rate that we are at double our 2015 production rate and we will continue as our recoveries increase. And so remember we've just been running it for 30 days with what we believe to be pretty significant success. We've exceeded all of our budget expectations for that transition. So I think the ramp up as I mentioned earlier will continue at a pretty rapid pace. And then we will have an ability to give you a much clearer set of guidance around what those costs look like as we continue to ramp up. So I think it's a little premature. As we said in our last quarter call, as soon as that we had good solid numbers, good solid production rates that were very dependable, that we would give you guidance. But everything is going actually better than planned. As to the Trio pricing, we're still seeing resiliency in the market. Trio continues to be very much in demand. As far as MOP pricing, with Agrium attempting to raise pricing, and Mosaic attempting to raise pricing, we feel like we've seen a floor on the river, the river is clearly cleaned up. So from a macro economic standpoint, we're seeing soybean pricing doing well, corn pricing holding up better than just about any analyst that we can look back and find had predicted. Soybean pricing, sugar pricing has improved. So there are a lot of positives out there that don't get talked about. And then if you look at the potash, it's come off the American market. We believe we're going to see some – we should see some firming in pricing at least a solid floor. And that should hopefully provide a continued resiliency on behalf of the Trio market. We've had a lot of interest in potentially exporting some of our Trio. And so those don't have as high of netback. But we've also entered into several new warehouse agreements here in the United States as we believe this market has the opportunity to significantly grow. So we're going to focus our time and energy on continuing to grow the Trio market, rather than trying to buy market share. And as we go out and increase our warehouse footprint, we're seeing the demand. The demand is out there, so we think it's a bigger market. And because Intrepid has not been a reliable supplier and will now be a very reliable supplier, we feel that the market is here in the United States and it should be resilient. And I hope that answers your question.

The next question is from Don Carson of Susquehanna Financial.

Just couple questions. So as you go forward, what's your volume capability at the solar facilities? I know that is somewhat weather dependent but what kind of quarterly volume should we be looking for? And Bob, your comments on price. My understanding is most potash domestically is price protected, so there are some downward price adjustments to come in the current quarter even if the benchmark prices have stabilized?

Yes, I am going to let Jeff answer that. But we’ve experienced just about all the price protection as Alban [ph] has all come off. Jeff, do you want to add some color to that?

Yes, I mean there's some stuff, maybe that little bit that goes for it but I think most folks have seen that solid floor and feel pretty comfortable to get them through the remainder of the spring season. Obviously going into the summer, the market dynamics will change as it goes through the summer. So we haven't seen -- we don't anticipate a ton of price protection going forward over the long term, that’s going to have an impact us in the short term if that makes –

We've seen all the price protection come off. And so all those tons have settled up. So unless you're aware of some tons that we're not, we’ve seen all of our price protected tons have cleared.

So we're not -- so we shouldn’t expect any downward adjustments to pricing in Q2 and it sounds like you think we've reached the bottom here at roughly 216 for MOP on realizations.

Well, I guess what I'm saying is, two of the biggest Canadian producers are trying to raise pricing. And so we don't know if they're going to be successful with those price increases. We've raised ours and we're certainly achieving those price increases in our truck markets. So I mean, Don, we’ve had this conversation many many times and trying to prognosticate where the price is going to go, I don't think, is a great exercise but we as of today have seen a pretty firm floor. And what that's going to look like in the next few quarters, we don't know but the same people that prognosticated $7 soybeans are staring at $10.23 soybeans. So I don't know who to believe right now.

And can you comment on your sustainable volume from the solar facilities on MOP?

Yes, Don, this is Brian. I’d refer you back to our 10-K where we take a look at each one. I mean, Moab has been around 100,000 tons a year, plus or minus depending on weather variability. Wendover is similar to that. HB continues to perform pretty well and I think you'll see greater numbers in that going through 2016 and beyond. So hopefully that gives you a little bit more color there.

The next question is from Sandy Klugman of Vertical Research Partners.

I was curious if you could tell me what price you feel you’d need to see in the potash market to justify bringing Carlsbad, West back online and would you actually need to see to provide you the confidence at the higher price level a sustainable?

Well, Sandy, there's a lot going on in the world right now. And so if you look at the difference in just the -- difference in currencies. So let's just take the US dollar. The difference between where the US dollar is trading today versus where it was trading in January is significantly different. If you look at where corn is trading, where soybeans are trading, they are all trading at levels that are much much higher than any one of the analysts that we read had predicted. So to give you a very specific price, West was very much on the border at these prices. Its cash burn rate was negligible. But in the face of trying to sustain capital as well we made the decision that we would much rather protect our downside. Let the upside take care of itself. So it’s not a lot in that it's going to require to bring that facility back up in terms of a percentage of current pricing and what we've seen recently. So I don't know if I'm answering your question but the market -- the world is a very dynamic place. And so when we look at all the other commodities and how they're reacting, we're very much on top of it and given the ability to put West in a reasonable care and maintenance mode gives us the confidence that if the market does change as we're seeing in the underlying ag part of the market, that we've got that opportunity to bring it back up. But to give you a specific price I just don't think it’s appropriate right now.

[Operator Instructions] The next question is from Joel Jackson of BMO Capital Markets.

Hi, good morning, Bob. A few questions. When you talk about the one and 125 cash costs normalized, is that including by-product credits or the growth of it?

Joel, this is Brian. Yes, those are net of the byproduct credits.

And then my follow up question is, looking at the different byproducts you have, mag chloride, salt, I think metal salt. Can you talk about what your byproduct credits would look like under the new profile? And then the same thing with royalties, I think would be pretty similar, I think the royalty rates in Utah and New Mexico are pretty similar.

Yes, we've achieved – every facility is different because at Wendover we own so much of that plant and fee. Our royalties in Moab I think are 2.5% right now or 2.75% but quite low. Royalties on langbeinite are 5% or Trio around 5%. And so I forgot the rest of your questions.

Byproducts.

Oh, the byproducts. Our goal is to significantly increase our byproduct markets. We've got good opportunities in the salt business. We haven't included any discussion around our opportunities in the salt and increasing our mag chloride businesses. So we're definitely going to focus on that so that we can continue to lower those costs.

Okay, is there -- I mean I realize it’s early and too many reasons – but do you have a sense of what type of profitability or free cash flow generation at current commodity prices do you think Intrepid is going to generate under the new profile? And anything you could do to help us with its gross margin – MOP businesses, not just the company, the total would be really help.

Joel, we've got a lot of internal modeling that we've done obviously. We just laid off 300 people this morning. And so we're going to be moving a lot of people from position -- different mine to different mine. We've been pretty clear that when we have an extremely good handle on what it'll look like the good news is every one of these facilities that are up and operating are cash flow positive and generate free cash flow. So we're going to be in a very different position than we were. And when we have the ability to give you the magnitude of that we will definitely share as quickly as we can. But I think we're going to be a smaller lower cost operation which gives us a much better opportunity to grow.

And on Trio, I believe Mosaic on their quarterly conference call last week talked about chem ag had fallen $50 a ton. I think you were down $30 a ton sequentially on trio realizations quarter over quarter? I mean, is that sound order of magnitude right, should we expect another $20, $30 drop in Q2? Now you talk about resilience, maybe some stabilization after that.

We're seeing resilience right now. And so Mosaic definitely for some reason took their price down. And we followed to some degree. But we're still seeing a very resilient market. As you know over the years, we’ve generally led the price up on that and feel like given what will be our cost structure on Trio that we will have the ability to be extremely cost competitive and hopefully be a leader in that product. So I think the good news is we've got several years of history with that. And I think Intrepid has performed extremely well with what we've had. And it's our intention to, as I said before, there's a lot of that market that can be grown, does not need to – it’s not our goal to go out and buy market share that's not who we are, what we want to do. So we're going to focus our opportunities on growing that market so that we can maintain that price resiliency. So I hope that answers your question and I apologize that it’s nebulous in this quarter but the Trio transition has occurred and it's occurred quite successfully. So that's the good news for us. End of Q&A

This concludes the –

I want to thank everyone for taking the time to dial in today. We appreciate your interest in Intrepid and we look forward to speaking with everybody in the near future. Thank you.